Grunbeck v. Dime Sav. Bank of New York, FSB

• Decision Date: 24 March 1994
• Docket Number: Civ. No. 93-356-B.
• Parties: Robert and Jennifer GRUNBECK v. The DIME SAVINGS BANK OF NEW YORK, FSB.
• Court: U.S. District Court — District of New Hampshire

848 F. Supp. 294

Robert and Jennifer GRUNBECK v. The DIME SAVINGS BANK OF NEW YORK, FSB.

Civ. No. 93-356-B.

United States District Court, D. New Hampshire.

March 24, 1994.

Jewel Kline, George Dickson, for plaintiffs.

Douglas Verge, for defendants.

Walter Maroney, for amicus curiae.

ORDER

BARBADORO, District Judge.

Robert and Jennifer Grunbeck seek declaratory and injunctive relief preventing Dime Savings Bank of New York, FSB ("Dime") from foreclosing on their home in Milford, New Hampshire. The Grunbecks allege that Dime's security interest in their home is unenforceable because the promissory note it secures authorizes Dime to charge compound interest in violation of N.H.Rev. Stat.Ann. 397-A:14 (West 1992). Dime presently moves to dismiss the Grunbecks' suit pursuant to Fed.R.Civ.P. 12(b)(6), arguing, inter alia, that § 501(a) of the Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C.A. § 1735f-7a(a)(1) (West 1989) (the "Monetary Control Act") preempts application of the New Hampshire statute to the Grunbecks' loan.

I. FACTS

Dime is a federally-chartered savings bank based in Uniondale, New York. In 1987, it began offering first mortgage loans in New Hampshire through Dime Real Estate Services of New Hampshire, Inc. ("Dime Real Estate"), a wholly owned subsidiary that was incorporated in New York but licensed as a first mortgage lender by the State of New Hampshire. Before going out of business in July 1989, Dime Real Estate originated approximately 1,500 adjustable rate, negative amortization mortgage loans ("negative amortization" loans) to New Hampshire homebuyers. Dime Real Estate routinely assigned its interest in these loans to Dime.

In January 1988, Dime Real Estate originated a $111,000 negative amortization loan to Thomas Richards and Timothy Ray to purchase a home in Milford, New Hampshire. As per routine, the promissory note and mortgage instrument were immediately assigned to Dime. In October 1990, the Grunbecks purchased the home from Richards and Ray and agreed to assume their liability for the loan.

The Grunbecks' negative amortization loan had an adjustable interest rate, adjustable monthly payment amounts, and the potential for negative amortization. The original loan agreement provided for the loan's interest rate to vary monthly at a margin of 3% above an indexed rate set by the Federal Home Loan Bank Board ("FHLLB"), and for the required monthly payment amounts to be adjusted annually to account for any rate variations that occurred during the year. To prevent "payment shock," payment adjustments were capped at preset percentages. The agreement's negative amortization clause, however, provided that any shortfall between the required payment and the total interest due in a given month was to be "deferred" and capitalized. The adjusted principal amount then became the amount against which interest was assessed for the subsequent payment period.

In 1993, the Grunbecks stopped making their required monthly payments and Dime instituted foreclosure proceedings. The Grunbecks responded by filing an ex parte petition in Hillsborough County Superior Court seeking to enjoin the forced sale of their home. The Grunbecks alleged that Dime's security interest was illegal and void ab initio because the loan's negative amortization provisions violated N.H.Rev.Stat.Ann. 397-A:14(I) (the "simple interest" law), which states that "any first mortgage home loan ... shall provide for the computation of interest on a simple interest basis."¹ The court denied ex parte relief and scheduled a hearing. Before the hearing took place, however, Dime removed the case pursuant to 28 U.S.C. § 1441(a).

Dime's motion to dismiss alleges that § 501(a)(1) of the Monetary Control Act preempts application of the simple interest statute to the Grunbeck's loan.² In addition to briefing and oral argument by the parties, the Department of Justice of the State of New Hampshire (the "State") has submitted an amicus brief addressing the issues raised by Dime's motion to dismiss.

II. DISCUSSION

Section 501(a)(1) states, in pertinent part

(1) The provisions of the constitution or the laws of any State expressly limiting the rate or amount of interest, discount points, finance charges, or other charges which may be charged, taken, received, or reserved shall not apply to any loan, mortgage, credit sale, or advance which is—

(A) secured by a first lien on residential real property ...;

(B) made after March 31, 1980; and

(C) described in section 527(b) of the National Housing Act....

12 U.S.C. § 1735f.7a(a)(1); see also 12 C.F.R. § 590.3(a) (1993)³ (substantially reproducing same). Dime alleges that the simple interest statute is a law "limiting the rate or amount of interest" that a lender may charge, and that its application to the Grunbecks' loan is therefore preempted by § 501(a)(1). The Grunbecks respond by (1) denying that the simple interest statute is a law "limiting the rate or amount of interest,"⁴ and (2) arguing alternatively that the statute is exempted from preemption because it is a "provision designed to protect borrowers." See 12 C.F.R. § 590.3(c). I conclude that the simple interest statute's application is preempted as a matter of law, and accordingly reject the Grunbecks' contentions.⁵ See Adkins v. General Motors Corp., 946 F.2d 1201, 1207-08 (6th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 1936, 118 L.Ed.2d 543 (1992).

A. Section 501(a)(1) — The Express Preemption Clause

Before addressing the merits of the parties' arguments, I briefly set out the legal principles governing my analysis.

1. Preemption Doctrine

The bedrock assumption underlying the various preemption doctrines is that "the historic police powers of the States are not to be superseded by ... Federal Act unless that is the clear and manifest purpose of Congress...." Cipollone v. Liggett Group, Inc., ___ U.S. ___, 112 S.Ct. 2608, 2617, 120 L.Ed.2d 407 (1992) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947) (brackets in original)). As a result, preemption analysis essentially requires a determination of congressional purpose. Id. Absent explicitly preemptive language, such a purpose to preempt may be inferred where Congress has completely displaced state regulation in a specific area, or where the state law conflicts with federal law or frustrates its purposes and objectives. Id.; Federal Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664 (1982).

Here, my task is to construe § 501(a)(1), the Monetary Control Act's express preemption clause. Given that there is therefore "no need to infer congressional intent to pre-empt state laws from the substantive provisions'" of the Act, id., ___ U.S. at ___, 112 S.Ct. at 2618 (quoting California Federal Sav. & Loan Ass'n v. Guerra, 479 U.S. 272, 282, 107 S.Ct. 683, 690, 93 L.Ed.2d 613 (1987)), my inquiry is limited to `identifying the domain expressly preempted' by the terms of the preemption clause. Id.; Greenwood Trust v. Massachusetts, 971 F.2d 818, 823 (1st Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 974, 122 L.Ed.2d 129 (1993). Because this inquiry thus is necessarily an exercise in statutory construction, I begin my analysis with the text of § 501(a)(1) and assume that its ordinary meaning accurately expresses Congress' purpose. Morales v. Trans World Airlines, ___ U.S. ___, ___, 112 S.Ct. 2031, 2036, 119 L.Ed.2d 157 (1992) (quoting FMC Corp. v. Holliday, 498 U.S. 52, 57, 111 S.Ct. 403, 407, 112 L.Ed.2d 356 (1990)).

2. Statutory Analysis

a) The Text

As evidenced by the parties' differing positions, the phrase "limiting the rate or amount of interest" has two plausible meanings. Dime argues that a law prohibiting the charging of interest on interest is a law "limiting the rate or amount of interest" because it reduces the number of permissible methods by which New Hampshire lenders can calculate the interest they charge. In other words, Dime essentially construes "limiting" as an adjective meaning "serving to restrict or restrain." Random House Dictionary of the English Language 1115 (2d ed. 1987) (unabridged) (defining "limiting"). The Grunbecks and the State interpret the statute more narrowly, arguing that a law "limiting the rate or amount of interest" is a law imposing an absolute, numerical cap on the interest that a lender may charge. They thus essentially construe "limiting" as a verb meaning to impose a "final, utmost or furthest boundary" on permissible interest rates or amounts. Id. (defining "limit"). Given that the text of § 501(a)(1) does not compel either reading of the term, I must look beyond the text to determine the scope of Congress' intent. See United States v. O'Neil, 11 F.3d 292, 295 (1st Cir.1993). I turn first to relevant administrative interpretations of § 501(a)(1).

b) Administrative Interpretations

Deference to reasonable regulatory interpretations is "singularly appropriate" when the statutory ambiguity lies in an area "intricately related to the agency's area of special expertise." Bank of New York v. Hoyt, 617 F.Supp. 1304, 1313 (D.R.I.1985) (Selya, J.) (quoting Citizen Savings Bank v. Ball, 605 F.Supp. 1033, 1042 (D.R.I.1985)). See also Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 2781-82, 81 L.Ed.2d 694 (1984). The deference due, however, depends upon "the persuasive force of the interpretation, given the totality of the attendant circumstances." Hoyt, 617 F.Supp. at 1314.

Here, the regulatory bodies charged with implementing the Monetary Control Act have implicitly adopted the term's broad reading, by twice construing the phrase "limiting the rate or amount of interest" to include state laws prohibiting the charging of interest on interest. In 1984, the FHLBB issued an opinion letter announcing its view that § 501(a)(1) and 12 C.F.R. § 590.3(a) (which...